Small is big in gaming world

Small can mean big bucks in the world of gaming where micropayments are being seen as playing an increasingly important part in making money for the industry.

The virtual goods market is a nascent but growing one, say analysts

Amid a downturn in advertising revenues, a recent survey at the GamesBeat conference in San Francisco found that 66% of those polled "were excited about this growing trend" which is most often seen in so-called 'free to play' games.

That is where it costs nothing to play but developers sell items or different levels within the gaming experience.

"Micro payments have been proven to work very well in the far east, Korea and China," said Dean Takahashi from VentureBeat, which organised GamesBeat.

"Initially they took off there because there is such a big problem with piracy and with a micro-transaction, you can always verify the credit card transaction or the payment system so you are assured people will pay up.

"The big test is whether North American gamers, the biggest market, are really going to go for this or not," Mr Takahashi told the BBC.

Analyst Michael Cai, who is the vice president of video games at Interpret, said young gamers like the new model but that is no guarantee of success.

"As this generation grows up the big question is what are they going to adopt and embrace? A lot of the publishers have started to embrace these (payment) models as well and everyone is looking at micro-transactions very carefully," said Mr Cai.

One game often cited as making the most of micropayments is Mob Wars, where players rise through the mob ranks by committing crimes and fighting other players.

Real money is used to buy weapons and other virtual goods on the site. The TechCrunch blog noted "some estimates suggest revenue may have peaked at $1 m (£667,000) a month and there are nearly 2.5m active users of the application on Facebook today."

Games as a service

In the free to play marketplace a company called Playfish has grown from 20m users to 60m in the last 18 months.

It has five out of the top 10 games on the world's biggest social networking site, Facebook. Playfish games like Pet Society and Who has the Biggest Brain? are also available on Apple's App Store.

The younger generation seem to embrace micropayments most

"We are huge believers in the free to play model because it minimises the barrier to entry for gamers and gets as many people involved for free as quickly as possible," said Kristian Segerstrale co-founder of Playfish.

And of course once users are hooked on a game, or invested in it, that is the perfect time to persuade them to part with some hard cash.

"Pets Society is our biggest playing game with 3 m daily users. In the game, gamers adopt a pet and take care of it. They can win coins to spend on, say, food or clothes or furniture.

"But not everyone has time to earn money in the game so they can spend $5 and buy 2500 coins, which normally takes days to win and spend it on what they like," explained Mr Segerstrale.

He said on average, players spend $7-$22 (£5-£15) a month and that "micro-transactions will win over subscription fees because they are more flexible."

"As games become a service, it doesn't make any sense to make users pay up front, no-one does that with their gas bill or telephone. You pay over time," said Mr Segerstrale.

"Friction"

VentureBeat's Mr Takahashi predicts the market for micropayments could become a multi-billion dollar business, if it takes off.

Apple's App Store has 6,000 games. 2,000 are free to play.

That might be one reason why Apple will later this year launch its in commerce app in the AppStore, which will allow developers to introduce new layers into games that they can charge customers for and ramp up the micro-transaction side of things.

"It's important for developers to boost their revenue stream and look at how to monetise software, especially if you are a business person, " said Neil Young the founder of NGmoco that makes games exclusively for Apple's 25,000 strong app store.

"My sense is that taking the friction out of purchasing things inside the gaming experience itself is going to lead to more usage and a better revenue stream for developers."

Facebook and MySpace are both working on their own payments systems but TechCrunch noted that it is the "nimbler start ups" that are making headway in this field.

It said Spare Change Payments is processing $2.5 m (£1.6m) a month in micropayments, adding up to a "$30m (£20m) annual run-rate."

"Entertainment"

As the online world becomes more mobile the use of the phone as a payment model is also expected to take hold.

While a recent survey by KPMG revealed that most people in the US have issues around security, a majority also said they would consider using their mobile if these could be addressed.

Mobile payments have great potential because of the ubiquity of the device

In Europe and Southeast Asia, mobile payment is one of the most popular ways to pay for virtual goods since nearly everyone has a phone.

In the US the uptake is slower because of the high fees charged by carriers, which are generally 40% of any mobile payment compared to 25% in Europe and between 5-10% in Asia.

In the world of mobile payments, gaming is the biggest driver of business said mobile payment company Zong

"Most of our transactions are coming from in game payments," said Zong founder David Marcus.

"The average transaction is five to six dollars with people mostly buying either virtual goods or virtual currency. It's a new kind of entertainment and if you look at certain games that cost $30-$40m to produce, it's a full entertainment industry that is looking to monetize these things.

"Now that Electronic Arts is launching their first free to play game, virtual goods and virtual currency will no doubt be a part of it and mobile payments are going to be a big part of it also," said Mr Marcus.

"Greed over gameplay"

In a struggling economy, much is being made of the new payment models trying to take root. Some in the industry however are concerned there is too much focus on making money.

"The revenue model always dictates the shape of the content and so different types of games will need to be created to support this type of mechanism," explained Rob Tercek, the president of mobile at the Oprah Winfrey Network and chairman of GDC Mobile.

"If it's a game where you are meant to pay for micro-transactions, then the designer has to design into the game the need for these upgrades or items for sale that may or may not be a great model, especially when played on a mobile device.

"My feeling is that a game is either a good game or a bad game and just because you bought a bigger gun or some better shoes shouldn't change the game," stated Mr Tercek.

NGmoco's Mr Young is also wary.

"As long as developers don't prioritise greed over game play. You need to remember that at the end of the day, we are there to provide fun gaming experiences for people. Not something where they are constantly badgered to pay up for something.

"It's a careful balance we will have to learn as game makers," concluded Mr Young.

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